Notorious R.O.B.

Move, Inc. — the folks behind Realtor.com and Top Producer — held its Q4 2007 earnings conference call recently. The transcript is available on Seeking Alpha. I think it’s well worth your time to check it out in full.

Move did $286M in 2007, vs. $280M in 2006. Considering the shape that the real estate market was in during the second half of 2007, that’s quite an accomplishment. What’s more amazing is that Move grew Q4 revenues by 2.4% to $71.7M in 2007. Michael Long, Move’s CEO, boasted:

In 2007, the toughest real estate market in 50 years, we grew revenues in our core real estate businesses, Realtor.com, Top Producer, and New Homes, amid unprecedented disruption and volatility. Revenue from Realtor.com and Top Producer on a combined basis was 10% higher than 2006. For the year we also delivered the highest EBITDA margin in our history and generated positive cash flow for the third consecutive year.

They’re in great shape.

Beyond the fact that they’re making money during tough times, I found three really, really interesting things from that call.

1. Move’s View of the Future

One of the most interesting is the view of the future that the Move senior execs have of the industry. They’re not immune to market forces — apparently, they’ve elected to trim the efforts from their non-core assets. Realtor.com, Top Producer, and New Homes made money — everything else seems to be sorta up in the air and on the way out.

This is Michael Long again:

Overall, we all have no perfect insight until when the real estate market will recover [however] we do believe that our market will come out of this severe down cycle fundamentally changed. There will be fewer but more professional real estate practitioners. We believe this cycle will prove to be a major catalyst for the [inaudible] online real estate category. Real estate has been lagging other industries in embracing the Internet and benefiting from a large scale shift and save of billions of offline advertising to a much more efficient way to reach consumers. Economic realities will drive this change. Most importantly we expect consumers will emerge from this cycle far more empowered and knowledgeable. The unpredictability and pain of the current real estate market is forcing consumers to do more research and achieve a higher level of understanding before transacting as well as learning how to more effectively manage their housing asset after purchase. This newly empowered consumer searching for a trusted source to help them make the best informed real estate decisions is our target. (Emphasis mine)

Move itself appears to shuttering some of their ancillary initiatives and refocusing on their core business with a “three pillar strategy”:

Number one, provide the very best online real estate search experience. That means the most housing options with rich timely property and neighborhood information that is incredibly simple to use. Number two, deliver unique proprietary content to extend our relationship with consumers throughout the move cycle. That means content that significantly improves consumer’s decision making and enjoyment of real estate connecting them to their neighborhoods, communities and professionals while converting them from real estate search users into recurring users. And then number three, understanding their behavior, demographics and consumer intent, so we can do a much better job improving the relevance and effectiveness of our advertising.

A couple of things.

Based on Move’s performance, and their future plans, it appears that companies offering real value to the agent/brokerage community will be successful.

FWIW, I agree 100% with the idea that when the industry reemerges from the current down cycle, we’ll see fewer and better agents. Question is, how and in what shape will that happen, and will the change be merely cyclical or more fundamental and lasting?

A good many current real estate agents are part-timers. The user profile I built back in the day while working at an ad agency was: Female, 40-55, homemaker, doing brokerage part-time. None of them are doing real estate brokerage to feed their kids; and yet, they will do one or two deals a year by getting friends and family to list with them, or hanging around the office and waiting for some web lead to come in.

Austan Goolsbee, now the Sr. Economic Advisor to the Obama campaign (but he still appears to be a decent well-respected economist), wrote about this issue back in 2005. The barriers to entry for real estate is far, far too low. The exam is too easy, and typically, there’s no other requirement. That there are 1.3 million Realtors in the United States is both evidence and symptom.

The result is that there are a lot of bad agents out there, who really don’t know anything, and haven’t put in the effort to become true experts and professionals. And even the good agents are often grouped together with all of the bad ones in the public’s mind.

Until one eliminates the “zero-profit condition” that is so prevalent in real estate brokerage, I don’t know that the industry will change much. Maybe the part-timers drop out for 2-3 years, but once the market turns around, they’ll be right back at it.

The obvious solution, it seems to me, is in the direction of fundamental changes either by the industry (NAR) or by the government. Make real estate licenses the equivalent of at least a Series 7 securities license; or perhaps even ratchet it up to make it the equivalent of a CPA designation. When it takes 150 hours of classroom work, and possibly a year employed full-time as a real estate agent, before getting a real estate license, that’s when one might say that the profession is truly professionalizing.

And yet, if you combine that insight — that there will be fewer and more professional agents after this market cycle — with what Move is doing, it raises several interesting questions.

While Move believes that there will be fewer agents, it is focusing on entirely consumer-oriented initiatives: best search experience, proprietary content, and consumer market research & analysis. There is no suggestion that Move will evolve to a paid-subscription model by the consumer; presumably, its businesses will continue to operate on a free-to-consumer, paid-by-the-professional model.

So if you’re anticipating a shrunken addressable market (fewer agents and brokers), but you’re focusing your attention entirely on the consumer… and you’re already #1 in the industry, wouldn’t that imply prices have to rise in order for Move to continue or even maintain its revenue growth? Either that, or Move is going into some new business models.

2. Move’s View of the Competition

A really interesting exchange occurred when one of the analysts asked Move’s team about its view on some of the competition. Mike Long responded:

I think it’s going to be very interesting to see how these businesses are going to figure out how to make any money frankly and we just haven’t seen anything. I think if we haven’t seen something it means it’s just as difficult to come up with any revenue model as one would expect it to be. So I don’t want to speculate on what’s going to happen but one could imagine because of the diversion between the public market valuations and what [inaudible] is prepared to pour into some of these businesses, next round may not look as attractive as prior rounds and they’re really going to have to figure out an exit.

Now… none of the Move team mentioned any competitors by name, but it seems relatively obvious which companies they’re referring to. As private companies, neither Zillow nor Trulia have any public financial information available. I know Zillow has raised $87M in venture funding to date, and Trulia has raised $17.8M, but as Move so obviously points out, funding != profitability.

The thing that makes this comment so interesting to me is that at the surface level, there isn’t a huge difference between Move’s core Realtor.com busines and Zillow and Trulia. All three are advertising supported, and the base of advertisers are real estate agents/brokers. All three are based around home listings as the primary content. Arguably, Zillow is trying to make Zestimates its signature content, but even they need listings to generate the traffic that generates the eyeballs that attract advertisers.

The only thing that sets Realtor.com apart from the other two (not to mention some of the newer players like Roost) is its official relationship with NAR and its lead in having negotiated deals with MLSes. Today, Realtor has the most listings, and has been around the longest, but that can certainly change.

(To be sure, the Top Producer business is very different, but it appears from the 10-K that most of the growth in 2007 was coming from the Realtor.com business.)

Seems to me that the initiatives that Move is planning on — topnotch user experience — are a response to the threat posed by the newcomers. Frankly, the unmentioned competitors brought excellent user experience and second-generation search to the real estate space. Trulia in particular, and the newcomer Roost, have focused on the actual search user interface to a degree that Realtor frankly has not. That, it looks like, is going to change.

But keep in mind that in the Realtor.com business, there’s nothing fundamentally different in the strategy that Move is pursuing vs. their unnamed competitors. In fact, one can argue that Realtor is trying to take the Fast Second strategy to beating down the pretenders to the throne.  Copy what’s been successful, but execute better, with more money and more resources, and beat the newcomers at their own game.

That will be an interesting thing to see: the venerable Realtor.com reborn as a truly compelling consumer experience.  Seems to me that Lorna Borenstein, the new President, is going to bring fire, pain, and thunder to the competition in the online real estate search space.  Read her comments — she seems very smart, seems to know what’s what, and has opened a new product development center in the Valley.

3. Keep An Eye On This

Lastly, and I don’t know that this is much of anything, there was an interesting piece of information regarding some of Move’s short-term investments. This is Lewis Belote, the CFO, again:

As of December 31^st our cash and short term investments were $175.6 million which includes $130 million of investments in auction rate securities. These are high grade AAA rated student loan federal government backed auction rate securities issued by student loan funding organizations which loans are 97% guaranteed under FELP, the Federal Family Education Loan Program. Historically, these securities have been considered short term investments and were highly liquid as the interest rate reset every 28 days and allowed investors to either roll over their holdings or sell them at par. However as has been reported in the press earlier this month the auctions for auction rate securities backed by student loans failed. The auction rate securities continue to pay interest at LIBOR plus 1.5% and there’s been no change in the rating of these securities. As a result of the failed auctions these securities are currently not liquid. We may not be able to access these funds until a future auction of these investments is successful or they are redeemed by the issuer or they mature.

He went on to mention that there is no reason to worry, because there’s no evidence the investment is impaired, and that Move has plenty of money to carry out their business plan.  Certainly, their revenues and cashflow are both substantial.

That may all be true.  But at the same time, I just can’t fathom how a company is not affected when nearly 3/4 of its cash might no longer be cash.  The possible impact could be an inability for Move to make strategic moves such as acquisitions — although I suppose they could always use stock for that.  Plus, the fate of the real estate market and the credit markets these days appear to move in tandem.  A serious shock to the system that makes auction-rate securities possible could also bring on a major problem in the real estate sector.

Again, this is probably nothing, but it’s something I thought was worth keeping an eye out for future news.

-rsh

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